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Broker's take: CGS-CIMB reiterates 'add' on Singapore hospitality Reits, says market has priced in downside risks

CGS-CIMB on Monday reiterated its "add" call on Ascott Residence Trust (ART), CDL Hospitality Trusts (CDLHT) and Far East Hospitality Trust (FEHT), saying the market had priced in potential downside risks.

With the three Singapore hospitality real estate investment trusts (Reits) trading at a price to book value of 0.6-0.8 times, investors appear to have factored in "at least a 15 per cent asset valuation decline", analysts Eing Kar Mei and Lock Mun Yee wrote in a research note.

"While the sector lacks catalysts in the near term for share price outperformance, we reiterate 'add' on ART, CDLHT and FEHT as value has emerged," the analysts said. 

CGS-CIMB's target prices were S$1.06 for ART, S$1.20 for CDLHT, and 59.2 Singapore cents for FEHT. It also maintained its "overweight" rating on the sector.

Stapled securities of ART were trading at 95 Singapore cents by the midday break on Tuesday, down 0.5 cent or 0.5 per cent. CDLHT was trading at S$1.03, up S$0.04 or 4 per cent, while FEHT stapled securities were up S$0.01 or 2 per cent to S$0.50.

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The analysts cut their forecast for ART's FY20-22 distribution per unit (DPU) by 18-53 per cent, and CDLHT's FY20-22 DPU by 16-36 per cent to factor in larger revenue per available room (RevPAR) or revenue per available unit (RevPAU) declines.

"Expectations of both companies came in below our FY20F DPU forecasts," they said.

Ms Eing and Ms Lock noted that ART and CDLHT had issued profit warnings recently given the "challenging environment". ART is expecting its H1 DPU to fall by 65-75 per cent year on year to 8.6-1.2 Singapore cents, while CDLHT is expecting its DPU to decline by 60-70 per cent year on year to 1.66-1.25 cents.

However, they said FEHT "is in a better position vis-a-vis ART and CDLHT, given its hotels are fully backed by master leases".

Ms Eing and Ms Lock said it was "unlikely" that Singaporeans would be able to travel for leisure this year. This could indicate that the Republic may not open its borders fully to foreign leisure travellers in the near term, they said.

The analysts noted National Development Minister Lawrence Wong's comments that Singapore’s travel advisory position is unlikely to change in the near term as Covid-19 remains widespread around the world, but that negotiations with countries on reciprocal green arrangements will proceed to facilitate essential business travel.

"We see the above as a likely scenario, given the resurgence of cases in many countries recently," the analysts said.

Ms Eing and Ms Lock added that they expect "a very gradual recovery for the hospitality sector as countries open their borders cautiously".

They lowered their FY20 year-on-year industry RevPAR growth forecast from 60-70 per cent to 40-50 per cent, and revised their assumed recovery in tourist arrivals in the second half of the year to 30 per cent of last year’s arrivals, down from an average of 80 per cent used in previous forecasts.

Business travellers only accounted for an average of 15 per cent of Singapore’s total visitor arrivals over the past five years, they added.

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